As a parent, our most overriding instinct is to care for our children, and do what’s best for them. Safeguarding their futures, and giving them the best possible opportunities in life that we can is what comes most naturally. But, in the process, it can be quite easy to forget about preparing for our own futures, particularly with respect to retirement.
That certainly reflects on a larger scale, with recent research indicating that Brits will have the lowest-value pensions of any of the world’s major economies. It really puts things into perspective, given that we always read about economic troubles in places like Europe, and yet it turns out that our retirement planning isn’t what it perhaps should be.
It seems as though this has been one of the priorities of the previous parliament, given the emphasis they put on pensions.
Auto enrolment programme
The automatic enrolment pension plan is a new scheme whereby all employers are compelled to enrol their employees into a pension scheme – and pay towards it. This is being introduced in stages, but will take full effect by 2018. As a worker, you’ll be automatically enrolled if you are aged 22 or over, and earn £10,000 a year or more. The minimum contribution towards your pension will be 2 per cent of your earnings, which will be comprised of minimums of 0.8 per cent from your own contribution, 1 per cent from your employer and 0.2 per cent from tax relief.
What is tax relief?
Tax relief means that your pension contributions are deducted from your pre-tax income. That means that after this money has been deducted, you get taxed on a smaller amount. So really, having a pension involves a double benefit: this tax relief, along with the contribution from your employer, which effectively amounts to free money.
So are pensions the best way to plan for retirement?
For the reasons just mentioned, pensions are a staple way of saving for retirement. But they aren’t the only option. The one downside to pensions is the restrictions relating to withdrawing from them, and it can be costly. The rules changed last year such that those who turn 55 will now have full access to their pension pots, and effectively be able to treat them as a bank account. However, while the first 25 per cent of each withdrawal will be tax free, the rest will be subject to income tax (at your highest rate of tax).
For this reason, there may be a more appealing alternative in the form of the incoming Lifetime ISA. From April 2017, all those resident in the UK between the ages of 18-40 will be able to open this type of account, and contribute up to £4,000 a year and earn a 25 per cent top up from Government (ie: a bonus of up to £1,000 per year). Given that you can contribute until the age of 50, it means that there’s scope for anywhere up to £32,000 in free money.
It is worth noting though that withdrawing from this account before the age of 60 (unless it is due to funding a terminal illness) will result in a forfeiture of the bonus, and a 5 per cent penalty charge. However, withdrawals after the age of 60 will be free (subject to any charges from the provider). So it is important that, should you choose to go down this route, you are in it for the long haul.
An eye on the future
As with most things in life, there is no silver bullet when it comes to pension planning. But there are some pretty good options out there nonetheless. It’s just important that, even with challenging economic times being forecasted in the next couple of years which may stretch our savings, we always keep an eye on the future to ensure that our golden years can be a safe and secure time to enjoy with friends and family, rather than being weighed down by financial concerns.